Charter Hall Office REIT: cold cash talks

Six weeks ago, the perceived wisdom was that for any buyout to succeed in the sector investors would have to pitch within a 3 per cent margin of the vehicle’s net tangible asset (NTA) backing.

Not surprisingly, then, the bid last month from a Macquarie-led consortium of investors for
Charter Hall Office REIT
was greeted with howls of protest.

The $2.39 offer for the trust’s Australian portfolio represented a 9.1 per cent discount to its net tangible asset backing. Few in the market rated it as a serious bid.

This was partly down to the dilemma facing the A-REIT’s independent directors, who earlier in the year had forcefully rejected a move by three hedge funds angling to eject the manager in advance of a possible wind-down of the vehicle.

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Investors were urged to support the incumbent,
Charter Hall Group
, and await the widely forecast recovery in the office sector that would propel the unit price back up to NTA in two to three years’ time.

But since then the mood has darkened considerably. There is now growing alarm over another global recession.

So when the Macquarie-led consortium, which includes the Singaporean wealth fund GIC and the Canadian Public Service Pension Fund (PSP), threw down another 4¢ on Wednesday to bring the offer price up to $2.43, the market reaction was far more considered. That equates to an extra $20 million and narrows the NTA gap to 7. 6 per cent.

While many analysts, including John Freedman of UBS and Michael Scott of JP Morgan, issued research notes predicting a potentially successful takeover following another price increase, others in the sector pointed out that, given the opportunity, cash-starved investors would most likely take the money and run.

Roger Davis, the A-REIT’s independent chairman, this week described the revised offer as “completely inadequate".

Some in the market see this as the normal sabre-rattling of the takeover game and argue that in this economic climate even a meagre increase should be welcomed, given the rest of the sector is trading at a discount of 20 to 25 per cent.

Some institutions say they are inclined to accept the revised bid, which remains conditional and is subject to non-exclusive due diligence.

One view is that the cleanest and quickest way for
Macquarie
to get control of the assets it wants is to bid for the trust “lock, stock and barrel’’.

For unit holders, it would offer speed and certainty. Rather than awaiting the results of the sale process for two sets of assets on two continents – the US and Australia – they would get cash and the opportunity to reinvest it elsewhere in the REIT sector.

But from the point of view of the Macquarie-led consortium, an outright bid transfers the risk of the US asset sales falling over or being otherwise delayed.

That would also justify what is a bigger discount than has been seen in previous deals in the sector. The revised proposal includes an option enabling the consortium to close the transaction before the conclusion of the $1.7 billion US portfolio sale.

With recent currency movements, the total sale price for the US portfolio translates into $3.65 per security, against $3.52 originally.

Those advocating a higher bid point to the stabilisation of the Australian office market and the growing demand from offshore buyers for premium-grade real estate in city centres.

Last July, Colonial First State Property’s listed Commonwealth Property Office Fund sold a Sydney tower for 15.3 per cent above its book value.

Yet Charter Hall Office REIT’s chief allure is its four blue-chip properties in the central business districts of Sydney and Melbourne.

Those assets account for around 40 per cent of the Australian portfolio. The remainder is largely secondary real estate, where valuations are distinctly wobbly.

As the storm clouds gather over Europe, an offer of hard cash looks hard to resist.